Module 1 - Adjustment Lending for Agriculture Policy Reform

Adjustment lending for agriculture (lending to support policy and institutional change for sustained economic growth) expanded greatly in the late 1980s and 1990s, but project design and analysis focused relatively little on poverty. Some programs have tended to rely too much on conditionalities and tranching. Challenges for future investment in agricultural adjustment programs include improving analytical capacity, building government ownership and support, improving the design and application of repayment conditions, ensuring that the poor benefit, and improving collaboration with other donors. Within the World Bank, new operational policy guidelines are expected to improve adjustment lending (or “development policy lending”) and eliminate some of the past restrictions on these programs.

After focusing on major infrastructure investments in the 1960s and 1970s, attention turned to the “software” side of development and the provision of services and the policy environment for development. Policies that distorted private sector investment and activity, especially with regard to marketing products and inputs, were an obvious constraint to growth during the 1980s. Strategies evolved for dealing with these distortions through loans conditional on market-liberalizing policy changes. These loans, variously called “structural adjustment loans” (SALs) and “sectoral adjustment loans” (SECALs), were devised largely to encourage governments to retreat from private sector activities and to facilitate more open economies. Agricultural sector adjustment loans (ASALs) were designed specifically for the agriculture sector.

Lending for Agricultural Sector Adjustment

Adjustment loans aim to support the policy and institutional changes that are needed to create an environment conducive to sustained and equitable growth. Adjustment operations generally aim to: promote competitive market structures (legal and regulatory reform); correct distortions in incentive regimes (taxation and trade reform); establish appropriate monitoring and safeguards (financial sector reform); create an environment conducive to private investment (judicial reform, adoption of a modern investment code); encourage private sector activity (privatization and public-private partnerships); promote good governance (civil service reform); and mitigate short-term adverse effects of adjustment policies (establishment of social protection funds) (Jayarajah and Branson 1995). Eligibility for an adjustment loan requires agreement on policy and institutional reform actions and satisfactory macroeconomic management. Funds are disbursed in one or more stages (tranches) into a special deposit account, with tranches released when the borrower complies with stipulated conditions such as the passage of reform legislation, the achievement of certain performance benchmarks, or other evidence of progress toward a satisfactory policy framework.

Adjustment operations accounted for 17 percent of total Bank lending in the 1980s and increased to 29 percent of total lending during the 1990s. This increase is partly attributable to greater lending in the post-Soviet bloc countries, where the need to reduce the role of the state in the economy was great. Agricultural adjustment lending has varied widely, ranging from 5 percent of total agricultural lending in 1998 to 48 percent in 2002.